Ernest A. Schmitt is vice president of casualty claims for Johnson
& Higgins in New York.

Keeping watch on casualty losses is an inherent part of managing
risk in any business or company. As such, the risk manager must find
effective ways to manage casualty claims and should consider setting up
claims teams, establishing proper reserves, finalizing claims and
evaluating claims programs. Although risk managers take different
approaches to their claims programs, there are shared elements in every
successful casualty management program.

Professional sports managers know their players' strengths and
weaknesses, as well as the situations in which those players perform at
peak efficiency. Similarly, the risk manager must identify individuals
who can best assist in managing the organization's claims.
Generally, they consist of insurers, brokers and the company's
local managers.

Insurers provide claims coordinators for national accounts, but
their authority varies from carrier to carrier. Some insurers give their
coordinators carte blanche to work with an account in managing its
claims, others assign coordinators based on lines of business, and still
others use one coordinator for procedures and another for settlement
discussions. In each case it is up to the risk manager to determine the
authority of a particular coordinator. He or she must inquire as to who
will be involved in coverage questions and become familiar with the
strengths and limitations of that individual. For example, risk managers
must determine if the coordinator is better at handling workers'
compensation, products or automobile claims.

Large brokers usually assign one casualty claims person to handle a
particular account. As with insurers' claims coordinators, the risk
manager should become familiar with the knowledge and ability of the
broker's claims person and know if he or she will handle claims
problems wherever they arise or whether claims personnel from other
branch offices will be assigned the task.

When coverage questions arise the broker should be available to
assist. Arguing over a coverage dispute without broker intervention
usually benefits the claimant at the company's expense. Before a
claim reaches the company, the broker's claims handler should
screen all coverage questions raised by the carrier and step in
immediately if the carrier's position is flawed.

While knowing the carrier's and broker's claims personnel
is crucial to effective claims management, it is equally important for
risk managers to understand their own corporate structure. Even though
some risk managers are not responsible for loss control, they
nevertheless must understand the objectives of the particular
departments handling that function. In most large companies,
workers' compensation programs are administered by the employee
relations department, which interacts minimally, if at all, with the
risk management department. To have an effective claims management
program, the risk manager must step in and identify who is responsible
for workers' compensation and automobile and general liability at
the local level, then supply the insurer or claims service organization
with a list of those names. In addition, he or she must make the local
contacts for workers' compensation programs aware of their
responsibilities in managing claims and notify the claims service
organization or insurer when staff changes occur.

Designing a Program

After identifying the team at the local level, the risk manager
should determine whether claims will be handled by the insurer or a
claims service organization. As part of their service, insurers with
offices across the United States offer national account notices to
facilitate communication between the client and claims office. However,
many managers rely on the broker's claim personnel to compile the
account notice and follow up on compliance.

The procedures established between the insurer and/or claims
service organization and the risk manager depend solely on the needs of
the client. Even though the carrier's procedures are spelled out
for handling most claims, problems are bound to arise. It is the risk
manager's responsibility to assess the problem, contact the
company's affected local unit and if necessary, meet with the local
personnel and the local carrier or claims service organization. However,
if the broker's claims person is capable, the risk manager does not
have to be involved in the meeting. Ideally, claims procedures should be
concise and well-written. However, since insurers' claims
instructions are often verbose, the risk manager should approve the
instructions before submitting them to the field offices.

What Is a Proper Reserve?

just as the cost of claims paid affects the loss ratio of a risk
management program, the reserves established by an insurer or claims
service organization affects the company's bottom line. Therefore,
every risk manager should understand the components of a reserve. When
it concerns workers' compensation, an indemnity reserve usually
consists of temporary, temporary partial and permanent disability
benefits, death benefits and funeral expenses. The workers'
compensation medical reserve includes the cost of medical care and, if
provided in the jurisdiction, rehabilitation. The expense of handling
that claim, including the attorney's fees and medical examinations,
are covered in the total reserve. To have a viable workers'
compensation claims management program, risk managers should do
everything possible to limit employees' temporary disability
benefit costs. Assigning injured workers to less rigorous tasks is the
best method for controlling workers' compensation claims costs. The
light work program should have target dates showing when individuals
will return to their regular jobs. Without proper monitoring, light work
can result in a high percentage of employees falling behind production
demands.

While most risk managers are familiar with the problems associated
with high loss reserves, low reserves can have an equally adverse affect
on a company's overall financial picture. One way to test the
adequacy of such reserves is to conduct a reserve analysis, which in
most cases can be performed by the broker's claims professionals.
Insurers vary on how they handle reserve analysis. Some allow
brokers' claims professionals and their clients to review the
claims file, while others only answer questions pertaining to it.
Insurers also differ on reserving practices. Some reserve on a full
liability exposure; others on a percentage of full liability. Thus, with
one insurer, a reserve on a death case valued at $400,000 could be
$400,000; with another insurer, that reserve could be $40,000.

Risk managers should also be aware of the various reserve practices
in their claims program. Insurers tend to reserve higher than claims
service organizations. However, claims service organizations raise, or
step up, their reserves more frequently. Self-insured and
self-administered workers' compensation programs, if reserved, tend
to be highly "stepped" in design, whereas local administrators
tend to reserve very close to current expenditures.

Finalizing a Claim

Claims can be closed by denial of payment, settlement or judgment.
However, many new approaches to settlements have evolved. With
workers' compensation claims, jurisdictions are permitting more and
more compromises and release settlements in which parties agree that a
bonafide workers' compensation claim does not exist. In exchange
for a specified sum, the claimant agrees to drop any future claims
involving the incident. This particular approach is often used when the
extent of medical injuries or whether they were sustained on or off the
job is questioned.

Increasingly, structured settlements are used to dispose of all
types of claims, including workers' compensation. No longer do
structured settlements come into play only in million dollar
settlements; insurers are using structured settlement annuities to
settle claims of less than $20,000. For such a settlement to be
effective, however, an annuity settlement should come only after the
claimant's past, present and future costs have been thoroughly
analyzed.

To dispose of case backlogs, insurers have also turned to
intercompany or strict arbitration. This approach serves mainly to cut
defense costs, which have become a major expense to insurers. The
process costs disputing parties a small filing fee, and it reduces the
amount of time company representatives and attorneys would otherwise
have to spend in court. Risk managers also encounter products claims
that give rise to property damage claims. These are best settled with a
monetary payment plus, when necessary, a "donation" of raw
material and/or unfinished product to the customer.

Evaluating the Program

An effective claims program must be continually evaluated as to how
well claims are serviced at various locations. A typical claims program,
particularly one for workers' compensation, provides a detailed
survey of its claims service to each of its locations at least once
every 18 months. Among other findings, the survey determines the extent
of effective communication between the local unit and the servicing
claims office.

Certain survey questions are basic to all risk management programs
involving workers' compensation. Are workers' compensation
payments made on a timely basis? Are medical bills paid on time? Is the
insurer or claims service organization discussing pending cases at the
various locations? Does a free flow of communication exist before the
cases are settled? How can the risk manager assist the local units? As
survey results are tabulated, problems should be separated into two
areas: serious problems that can only be resolved with a meeting of
local level claims personnel and those that can be handled on the
telephone.

To manage casualty claims, the risk manager must become familiar
with the abilities of the claims team, design an individualized claims
program for each account, know what constitutes a proper reserve and
find effective means to finalize claims. In other words, the risk
manager must continually evaluate the entire claims program. This way,
he or she is meaningfully contributing to corporate goals.

COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.